Not enough ammunition in the market: Sameer Narayan

In the market, what is it that you have been doing? Have you bought or sold anything in the last 15 days?
The prices were absolutely unimaginable a month or two back; so these prices have actually numbed up quite a lot of investors because one did not expect such a severe correction in such a short time. When those prices are available, it looks like a big buffet in front of you but unfortunately, there is not enough ammunition.

Hence, what you need to do is pick up your bets and go with it gradually; go one-third. One-third because we still have to see the entire capitulation phase in terms of either the sentiment or the flows. So it is better to keep some powder dry.

How is it that you explain this kind of weakness that one is seeing in the private banking names? Is that an indication that a bottom may be somewhere near? How is it that you are going to treat the weakness that you are seeing in the likes of a Kotak, an IndusInd Bank, an HDFC, HDFC Bank, etc?
There are two angles to that. The first one is that there is an ownership issue. In case you have seen, there was almost close to $8 billion of FII sales in the last month. Private banking was a crowded trade for almost the last five years and that is visible across most of the FII holdings as well. So whatever they own is only what they have been selling. So that is one element of selling.

Secondly, with this entire moratorium and liquidity measures that have been taken and provided, the problem is that you will see asset quality worsening at the margin. Although there is not much unsecured retail lending that most of these private bankers have done; that is pretty much there for the NBFC space. But the problem now is that after people come back from whenever we get behind this thing, the entire moratorium will ensure that you do not have any sort of servicing happening on the asset side but at the same time you need to probably service the liability side. So there is some sort of a mismatch and that is where the valuations again being 3.5-4 times book, they were quickly seeing the fact that there was a lot of growth that was implicit in those.

Why has a stock like Bajaj Finance fallen 50%?
There is a fundamental concern there because there has been some amount of relief given on the EMI payments in terms of a moratorium. But if you see, 60% of most of the funding for even most of the large NBFCs is actually apart from banks. They take on a lot of bonds and other liabilities which they have to continue servicing. So there is still no clarity as to what will happen on that because in case I do not get my assets being serviced for three months, I still have to make my interest payments to my bond holders. So what do I do with that? That is where there is a concern.

As we have discussed, the ownership was high, the valuations were rich and more importantly, the growth will come off a fair bit. So even a 20-25% kind of a book growth for Bajaj Finance will be tough in these circumstances because I do not think the market today is in a position to give you that kind of credit demand in the overall economy for you to be going and gaining market share from wherever one sees the activity pick up once the lockdown lifts.

We have been monitoring what is going on with respect to the pharma space. We do tend to see some interesting value buying within the pharma space as a whole. What is the sense that you are getting when it comes to pharma stocks at the current juncture?
If you look at what the last month has been for most of the pharma stocks; one, they were the positive beneficiaries of very low ownership. So they saw very little incremental selling flows; that is on the technical side. Second, there is a lot of hope that the companies will come up with some cure or vaccine sooner than expected but right now that will probably be a bit far fetched because anything has to go through human trials; so that is a minimum waiting period of close to nine months to a year at least.

But there have been some positive spikes in terms of the anti-malarial being slightly effective in addressing the spread or maintaining the health of people who have already been diagnosed with COVID-19. So the Hydroxychloroquine (HCQ) supplies, etc has created some amount of buzz.

But on the other side, you also had a price ceiling fixed as late as last evening for about 833 formulations; so the earnings growth for the sector at least on the domestic market still does not look very rosy. Yes, on the exports side, there might be some opportunities, case by case as some approvals have been coming in recently for companies. But the valuations still have not corrected to levels whereby one could really see that there is a relative value because given the kind of value that has emerged across the market over the last month, I do not think this sector will continue to find flows till the time there is some meaningful improvement in the visibility of earnings.

Should auto stocks be avoided? It is the first of the month and we will have the monthly sales data come in and on expected lines, it is going to be a disastrous number that we are going to see for the previous month. So would you say that these stocks could be avoided completely right now?
The correction in auto has been fairly severe. If you see, probably since March 2018, some of the leading stocks have corrected as high as 50-60%; so the price impact has been massive. Obviously there was an element of emission norm change as well as the entire EV-related capex and the resultant commitment in the balance sheet.

Now when we put FY20 to a close, the emission norms are now a reality. So now you will see the inventory correction happening once the normalcy is restored but the valuations have corrected a fair bit. But yes, there has to be some element of change in the buying behaviour as well because now that the world has realised that we can operate, if not at the optimum, a fairly good level in terms of working from home, the entire need for mobility will again be revisited.

I am sure that the entire auto demand or passenger car demand coming back to its earlier normal may not be any time soon in the near future.